By Aubrey Clegg, CPA                    Senior Audit/Tax Manager

With the recent passing of the Tax Cuts and Jobs Act, credit unions will now need to take into account a new 21 percent excise tax on compensation paid to each of its top five compensated employees in excess of $1 million. Unfortunately, this could have a significant impact on credit unions’ executive benefit programs, not to mention credit unions incurring higher expenses to retain talented executives.

Credit union CPA firm Doeren Mayhew has outlined three key aspects that credit unions will need to consider as it relates to the excise tax changes:

1. Excise Tax on Remuneration in Excess of $1 million

Designed to help offset the tax reductions associated with other provisions of the Act, the 21 percent excise tax also aligns tax-exempt organizations, such as credit unions, with taxable entities with respect to the limitations placed on deductions related to compensation. That is, taxable entities have long been restricted in deducting compensation in excess of $1 million for its top earners.

Under new tax laws, a 21 percent excise tax is imposed on the organization (not the employee) for the amount of remuneration (compensation reported in box one of Form W-2, except for excess parachute payments) in excess of $1 million earned by each of its top five highest compensated executives during the tax period, as well as any executives previously considered one of the five highest compensated since Dec. 31, 2016. Therefore, an organization may potentially be subject to the 21 percent excise tax beyond just the current top five highest compensated employees.

For those that don’t know, remuneration includes all compensation not subject to substantial risk of forfeiture under 457(f)(3)(B) of the Internal Revenue Code. Therefore, fully vested or paid deferred compensation benefits are included as compensation subject to the excise tax as a lump sum, not as it is being accrued by the credit union. This is important to keep in mind. For example, an executive may not have a salary that comes close to the $1 million threshold, but in the year that substantial risk of forfeiture lapses and/or a lump-sum distribution is paid, the combination of salary and a sizable benefit payout may easily exceed the threshold. Our credit union CPAs suggest you consider implementing a series of shorter vesting periods with more frequent payouts in smaller lump sums.

2. Parachute Payments

Essential to any severance payment, parachute payments may significantly impact credit unions as a result of the excise tax implementation. While parachute payments are excluded from the calculation of remuneration for the purposes of determining the amount subject to the 21 percent excise tax cited earlier, such payments meeting a certain threshold may still result in additional tax incurred by credit unions. Many credit union executives have severance packages built into their employment contracts given the current climate of mergers in the credit union industry.

Parachute payments are assessed the 21 percent excise tax when the payment is equal to or greater than three times a highly compensated executive’s salary. For credit unions, highly compensated employees are defined as those earning a base compensation of $120,000 or more. Base compensation is calculated based on the average compensation reported on Form W-2 over the base period, which is five years. Assuming the severance payment meets this criteria, the tax is equal to 21 percent of the amount of the parachute payment exceeding the executive’s base compensation amount.

For example, assume a credit union CEO has a base salary of $150,000. Upon his departure, he would receive severance pay of $450,000 (exactly three times the executive base).  A 21 percent excise tax equaling $63,000 would be assessed. If the same CEO’s severance payment was less than $450,000, the excise tax implication would be eliminated.


Whether your credit union is federal or state chartered, your reporting for excise tax will be impacted regardless of the level of compensation being paid to executives. All credit unions will likely have to report compensation amounts for the applicable covered employees whether it results in an excise tax assessment or not.

What still remains unknown is how this information will be reported. It has been speculated that Form 990 will be the reporting vehicle for this information, however formal guidance from the Internal Revenue Service (IRS) isn’t expected for a few more months. If speculations are right, this could mean the Form 990 reporting requirement would be extended to federally chartered credit unions.

Without final IRS guidance there is still some ambiguity to how the new excise tax will impact credit unions. Rely on the credit union CPA firm Doeren Mayhew to keep you up-to-date as developments occur. In the meantime, if you have questions, please contact our credit union CPAs.